Energy Policies of IEA Countries - New Zealand 2006 Review

Over the last two decades, New Zealand’s energy policy has been marked by a commitment to light-handed regulation, to ongoing government monitoring and review and to liberalisation. Relative to many IEA member countries, New Zealand has a small population, low population density and is isolated from the rest of the world. Given this, its success with energy market liberalisation is remarkable. In fact, New Zealand was a pioneer in electricity market liberalisation, whereas many countries are just starting down the path of liberalisation. Furthermore, the country’s strong commitment to undistorted and transparent liberalised markets is evidenced by a general lack of direct energy subsidies to specific customers or producers. Its commitment to ongoing review of its energy markets to ensure efficient and competitive outcomes is shown by the government’s recent creation of two new regulatory bodies, the Electricity Commission (EC) and the Gas Industry Company (GIC). In short, New Zealand should be proud of its high-quality energy policies.

Nevertheless, the government’s commitment to ongoing policy improvement and its new and very difficult energy challenges require continued policy evolution and government action. To that end, the government of New Zealand should strengthen its policy documents to reduce regulatory uncertainty, particularly in the face of recent energy policy and institutional changes. The energy strategy announced at the end of 2005 is a promising development and should be completed as quickly as possible.

The establishment of the EC and the GIC provides much needed regulatory oversight to industries that had previously been left to self-regulation. Furthermore, the new regulatory threshold regime for network energy businesses may improve transparency and efficiency in these industries by reducing the regulatory burden and increasing business flexibility. There are likely to be long-term benefits to customers from these new institutions and regimes, but in the medium term, the changes create uncertainty, which could inhibit appropriate investment.

While the establishment of the Electricity Commission puts in place an institution better equipped to make necessary regulatory reforms, its lack of complete independence from the government, including the government’s discretion on the removal of commissioners, is a cause for concern. The government should modify the governance structure of the Electricity Commission so that it operates independently. With respect to the GIC, a very new co-regulatory body owned by gas industry participants, some concerns have been raised as to whether it is a viable long-term institution. The government and the GIC should work to establish a stable regulatory regime as quickly as possible to minimise the negative effects of the current transition period. While New Zealand’s threshold regulatory mechanism for network businesses is an innovative regulatory approach, the mechanism may increase regulatory uncertainty as it is applied on an ex post basis. In certain situations it might be prudent to allow companies to apply for ex ante approval of particular projects to ensure that sufficient infrastructure is built and supply security is not threatened.